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Commentary on The Capital Markets- Category [Federal Reserve]

Not just Bernanke, either -- all of the FOMC and the entire NY Fed.

Mr. Bernanke is quoted making the statement in a document filed on Aug. 22 with theU.S. Court of Federal Claims as part of a lawsuit linked to the 2008 government bailout of insurance giant American International Group Inc.AIG +0.37%

“September and October of 2008 was the worst financial crisis in global history, including the Great Depression,” Mr. Bernanke is quoted as saying in the document filed with the court. Of the 13 “most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.”

From where I sit I allege that's either perjury or an admission of intentional and willful misconduct.

After all The Fed's mandate is to regulate money and credit supply.  That includes the credit that AIG was (ab)using with their little game.

Oh sure, AIG itself may have been outside of the Fed's regulatory umbrella, but the 12 financial institutions were not.

Any time the blue line is above the red the money and credit system, which The Fed is responsible for balancing under the law, is in fact not in balance.  It wasn't leading up to the crash in 2008 and it isn't now.

Therefore either Bernanke and pals were incompetent or complicit.  And since Bernanke claims competence, as does Geithner, that leaves only one option.

For how long will Americans allow this blatant, in-your-face outrageous crap to continue?

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Or is it something else entirely -- whether The Fed tapered or not it wouldn't matter, as they best they can do is pump the stock market?

Paul Schatz, president of Heritage Capital thinks so. He argues that it's important the economy fully recovers before there is a tightening, “The mistake that feds or governments make after the first recession, the minute the light in the tunnel is clear, they start raising rates. My argument is that GDP growth back to 4% or higher is not going to be seen until we get through one more mild recession.”

You're not going to get sustained GDP expansion of 4% or better at all because the debt overhang prohibits it.

That's the problem -- and yet the Fed's QE, along with deficit spending, expand that debt overhang.

While the individual year damage is (relatively) small, the cumulative impact is not.  It is also a bitch to reverse or resolve, because you have to unwind the entire mess -- and all the excess debt.

Evidence for this?


A quarter of American families are "just getting by" and 13% more are "finding it difficult to get by."  That's nearly 4 in 10.  A huge percentage, somewhere around half, couldn't raise a mere $400 without selling something or going into hock.  Only 30% are better off today than five years ago.

Education costs continue to ramp, and making debt more accessible and cheaper makes this cost go the wrong way.  The same thing is true for cars; the average auto loan term is now 66 months and a quarter are for terms over six years.  The average financed amount is at an all time high of nearly $28,000.

Even worse the average new car payment is now nearly $500 a month, or $6,000 a year.  How do you do that on an average working person's salary?

None of this is helped by "ultra low interest rates" or bond-buying.  In fact, it forces pricing and loans in the wrong direction.

So on the one hand we have a policy that has failed to raise GDP (because it can't), there is international (Japan anyone?) evidence that it doesn't work in this regard, and it causes harm in that it expands debt accreation by consumers across the economy.  That, by the way, is why the long-term negative impact on GDP comes; that which you buy today you not only don't need tomorrow in addition you must pay the interest, so it impacts your spending twice!

Yet you still have people insisting that we double down on a blown policy.

These people need to be shouted off the stage.

All of them.

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The title is the nonsense I just heard on bubbleVision.

That follows a few other bits of stupidity flying around on systemic leverage, the national debt and suppressed interest rates.

A few years ago Cathy McMorris-Rogers office, during the heat of the "shutdown" debate, and I had a series of rather interesting discussions that ultimately led me to use a few four-letter words in explaining how I felt about them -- and the Congresswoman.  The gist of the Republican argument is that we can't stop deficit spending "right now"; the excuses were many and varied, but all came down to the basic fact that they were afraid they'd lose public support (in other words, their jobs.)

The fact that the path they had embarked on was unsustainable because it was dependent on zero-boundary interest rates that could not continue on an indefinite forward basis during anything but an all-on collapse in consumer spending and thus the economy was a "secondary factor" and as a result we have seen Federal Marketable Debt go from $9.79 trillion to $12.57 trillion from Q2/2011 to Q1/2014, a 28% increase.

Put another way the current interest expense is budgeted to be $158 billion for this fiscal year (ending in September); of that $155.7 billion has been spent through July.

At a historical "nominal" 5% interest rate that would be over $625 billion for the marketable debt alone which would explode the deficit higher by nearly half a trillion dollars above today's run rate!

The government can't afford that and the markets would instantly punish such a fiscal profile, rendering the so-called "nominal" interest rate much higher than it would otherwise be.  That in turn would render the government and Fed impotent when the next cyclical slowdown in the economy occurred.

The simple fact of the matter is that with an asset prices are all that matters policy the fact that people are only buying cars and houses because of suppressed financing costs is ignored.  The fact the margin debt is at all-time highs is ignored.  That corporations are not spending on expansion and innovation but rather are borrowing money to buy back their own stock is ignored.

And that all of these acts have a term structure -- that is, the debt taken on must be either paid down or rolled over, is also ignored.

Historically that debt is never paid down.  Not in the government and not in the corporate sectors.  That's a fact, as anyone who peruses the Fed Z1 instantly realizes.  This of course works "well" in a world where the long-term trend in interest rates is lower, as it has been for the last 30 years.

It's ruinously bad in a world when that trend reaches its conclusion due to the considerations of arithmetic.

Nobody seems to remember the last time fiscal repression and manipulation came to an end in the bond market.  In the post WWII era The Fed engaged in repression for quite some time, and this appeared to be working quite well through the front half of the 1960s.  The problem came later, and boy did it come, with real 10 year interest rates tripling over a 15 year period.

That was quite a bitch back then, but were it to happen today the United States government would be rendered instantly insolvent.

Of course The Fed would not voluntarily let that happen, but at some point this isn't about voluntary actions; it becomes a matter of mathematics.  We're not there today but anyone who believes The Fed is in charge and will "get it right" need only look at both short term and long-term history. 

The fact is that The Fed has never gotten it right, and that's because The Fed doesn't adhere to its mandate as written.  Rather, it adheres to what Congress and the Administration want it to do, and moves off that position only when it has no choice (as occurred in the 1980s.)

As it has been continually in the past the belief in an all-powerful (and right) Fed will once again be disabused with ruinous consequences.  

The signs of stress are already present in volume, if you care to look, just as they were in late 1999, early 2000 and all through 2007.

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